DEAR AMERICAN COMPANIES: Here's How To Fix The Economy

He announced that he was going to more than double the wages he
was paying his employees, from $2.34 to $5 a day--the equivalent
of $120 a day in today's money.

The country was as shocked by this then as it would be today.

A powerful company voluntarily sharing some of its profits with
its rank-and-file workers and paying them more than it absolutely
had to?

Had Henry Ford gone mad?

Didn't he understand that the only goal of a business was to
make money?

Didn't he realize that, as a successful business executive, he
was entitled to make as much money as he could possibly
make--the financial health of his employees being nobody's
business but their own?

Didn't he understand that smart executives pay their employees no
more than "market rates" because the executive's job is to
"create shareholder value," everyone in our economy gets what
they deserve, and the financial well-being of employees is not
something that business owners or bosses or shareholders should
be concerned with?

Yes, Henry Ford understood all that.

The story you hear frequently about why Henry Ford made this
decision was that he wanted to allow his workers to be able to
afford to buy his cars. The wage increase certainly made the cars
(and many other products) more affordable for Ford employees, but
the historical consensus is that Ford actually made this decision
for a different reason: To reduce employee turnover--and, in so
doing, reduce recruiting and replacement cost.

Regardless, it worked.

Thousands of people immediately lined up to get jobs at Ford.
Employee turnover plummeted, and recruiting and training costs
dropped. The new wages allowed Ford employees to live
middle-class lives, instead of being poor. And it presumably made
Ford, Ford's senior executives, and Ford's shareholders even more
proud of what they had created.

In short, instead of viewing "shareholders" and "customers" as
the only two corporate constituencies that matter, Ford
introduced the idea that great companies should also serve a
third constituency:

Employees.

And because one company's employees are another company's
customers, Ford's decision helped spread the country's wealth to
more citizens and expand the purchasing power of the country as a
whole. And, in so doing, it helped the overall economy.

Specifically, Ford's unprecedented move also helped usher in an
age in which the middle class became the driving force in the
American economy, turbo-charging the nation's economic growth
right up through the early 1980s, when relative middle class
wages began to decline.

Henry Ford's story is highly relevant today.

Why?

I have a radical
idea. I'm going to pay my people more than I have
to.

Because we are facing a very similar economic problem as the
country did in the early 20th century. A glut of labor was
allowing companies to pay a pittance for a day's work, leaving
most of their dedicated employees destitute. Business owners and
executives (the equivalent of today's 1%) did fine, but most
rank-and-file workers did not. And this lack of spending power in
the middle class crimped overall economic growth.

If we want to fix today's ailing U.S. economy, we need many of
our large corporations to do what Henry Ford voluntarily did:

If the companies don't eventually see the benefit of doing this
and do it voluntarily, the government (an extension of the
people) will likely the mandate that they do it--either through
taxation or by radically increasing the national minimum wage.

And given that government solutions are often terrible solutions,
it would be best for everyone if we persuaded corporations to do
this voluntarily. So what follows is an initial effort to
do that.

Here's The Real Problem With The Economy

There's a lot of sturm und drang these days about who
wrecked the economy. And there is a lot of yelling about how to
fix it.

But the economy is complicated, so it's easy to get fooled by
someone who is yelling persuasively, especially if they play for
your favorite political team.

Lots of things are wrong with the economy, but the main problem
can be summed up with two simple facts:

Corporate profits as a percent of the economy are at an
all-time high

Wages as a percent of the economy are at an all-time
low

The following charts clearly illustrate that problem.

WHAT'S WRONG
WITH THE ECONOMY?

1. The health of any business or economy depends on the
health of its customers, and most American customers (consumers)
are strapped or broke. Consumers account for about 70%
of the spending in our economy, and the other 30% is tied to
consumer spending (when consumers are broke, businesses don't
spend--because there's no one to sell to.)

This sad state of affairs can be seen in the following chart,
which shows that the vast majority of the income in the country
goes to the top 50%. The bottom 50%, meanwhile, earn less than
$30,000 per year.

2. Most American consumers are strapped or broke because
most of the income gains in the past 30 years have gone to the
top 10% (and especially the top 1%). The chart below
shows the growth of incomes over the past ~90 years. The pink
section is the 1%.

3. This increasing inequality has many causes, including
globalization (cheaper labor overseas), a decline in the minimum
wage, the decline of private-sector unions, changes in the tax
code (tax cuts for the highest earners), and other
factors. But the bottom line is: Average hourly
earnings in America (adjusted for inflation) have not increased
in ~50 years.(Total
compensation, which includes health insurance, vacation time, and
other benefits has increased, but workers can't spend those
things).

4. At the same time, earnings for the highest-income
Americans have gone through the roof. For example, check
out how compensation for senior executives has grown relative to
compensation for "average production workers" and the minimum
wage (which has actually declined after adjusting for inflation).
And this is just since 1990.

5. Importantly, the problem here is NOT the weak health
or profitability of American companies (which was
a problem in the early 1980s). American companies
are earning more as a percent of the economy than they ever have.

6. One of the reasons American companies are earning so
much money is that they're paying very little to their
rank-and-file employees. This is also why average
earnings have been stagnant for 50 years and most American
consumers are broke. Wages as a percent of the economy are at an
all-time low.

We've been trying the "tax cuts for the rich" approach for
three decades, and it is making the inequality problem worse, not
better

Now, some other people are arguing that the way to fix the
economy is to increase taxes on the rich and companies and
"redistribute" this wealth to American consumers.

We will probably need to raise taxes on everyone a bit to reduce
the budget deficit (even if we reduce spending--the gap is that
big), but this "wealth redistribution" approach also almost
certainly won't work. Here are a few reasons why:

The key to creating a sustainable economic recovery is to get
the private-sector cranking, not the public sector

Having the government collect taxes and write checks to more
than half the country to make things "fairer" will understandably
ruffle the feathers of those who are paying those taxes

Class warfare won't help anyone

This is America: We solve our own problems in this
country--we don't wait for someone else to come along and give us
a handout.

So, then, if the answer isn't 1) cutting taxes for rich Americans
and companies, or 2) raising taxes on the rich and giving the
money to the poor, what's the answer?

Let's go back to the problem.

Here's the problem in one simple chart:

Corporate profits (blue)
are at an all-time high, and American wages (red) are at an
all-time low.

This has created a situation in which American corporations and
their owners are rich and American consumers are broke.

So, how do we fix the problem?

We persuade American
corporations (and their owners) to hire more employees and pay
them more, thus giving these employees (American consumers) more
spending money.In
other words, we take some of those surplus corporate profits and
invest them in Americans.

Put differently, we instill a new value system in our companies,
one in which employees--American workers--are treated as a
constituency that is as important as the two other corporate
constituencies that everyone already agrees are
important--shareholders and customers.

Jerry Maguire might have put it this way:

"Lower profits, higher
wages."

Persuading corporations to hire
more Americans and pay them more will fix the American
economy. It will not require the government to raise taxes
or grow even bigger. It will not require us to "soak the rich."
It will not even be a government solution.

All it will do is restore balance to a system that has become
very imbalanced in the past three decades.

Of course, whenever you suggest that the answer to our economic
problems is to persuade corporations to pay their employees more,
most people howl with laughter. Persuade corporations to pay
people more? What, are you insane? They'll
never pay people more!!! They're in this for
profit!

Well, when people laugh at you for suggesting that corporations
should pay people more, you can just point out the following:

Eventually, this will help increase corporate profits.

Why?

Because paying Americans more will not just lead to a reduction
in near-term profits. It will also lead to faster revenue
growth. Because American consumers--the
customers of all our companies--will have more spending money.

In other words, corporations don't have to suddenly become good
citizens when they decide to pay Americans more. They can keep on
being relentlessly competitive profit-seekers. They can pay
employees more with the knowledge that this will eventually lead
to faster revenue growth, which will eventually lead to higher
profits. So they can do it in their own self-interest!

Make no mistake: The kind of inequality that we have developed in
the past three decades is very destabilizing. When the vast
majority of people feel as though they're getting shafted at the
hands of a privileged few, they tend to rise up and rebel. This
can lead to the election of radical leaders, or, worse, violent
revolutions.

The inequality we have developed, in other words, will solve
itself one way or another. The richest Americans and companies
cannot keep getting richer while the rest of the country gets
poorer without the entire system eventually collapsing.

So, it would be nice if we made the necessary changes
voluntarily, before everything goes to hell.

And, besides, viewing employees as a very important corporate
constituency isn't just good for the economy--it's also good for
the soul. We're all in this together. And no one can do it alone.

So, how about it, corporate America?

How about taking a few percentage points of your record profits
and use it to hire more employees and pay your existing employees
more?